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on Corporate Finance |
| By: | Carletti, Elena; Oliviero, Tommaso; Pagano, Marco; Pelizzon, Loriana; Subrahmanyam, Marti G. |
| Abstract: | This paper estimates the drop in profits and the equity shortfall triggered by the COVID-19 shock and the subsequent lockdown, using a representative sample of 80,972 Italian firms. We find that a 3-month lockdown entails an aggregate yearly drop in profits of 170 billion euros, with an implied equity erosion of 117 billion euros for the whole sample, and 31 billion euros for firms that became distressed, i.e., ended up with negative book value after the shock. As a consequence of these losses, about 17% of the sample firms, whose employees account for 8.8% of total employment in the sample (about 800 thousand employees), become distressed. Small and medium-sized enterprises (SMEs) are affected disproportionately, with 18.1% of small firms, and 14.3% of medium-sized ones becoming distressed, against 6.4% of large firms. The equity shortfall and the extent of distress are concentrated in the Manufacturing and Wholesale Trading sectors and in the North of Italy. Since many firms predicted to become distressed due to the shock had fragile balance sheets even prior to the COVID-19 shock, restoring their equity to their pre-crisis levels may not suffice to ensure their long-term solvency. |
| Keywords: | COVID-19; Distress; equity; losses; Pandemics; Recapitalization |
| JEL: | G01 G32 G33 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14831&r= |
| By: | Ross Levine; Chen Lin; Wensi Xie |
| Abstract: | Do antitrust laws influence corporate valuations? We evaluate the relationship between firm value and laws limiting firms from engaging in anticompetitive agreements, abusing dominant positions, and conducting M&As that restrict competition. Using firm-level data from 99 countries over the 1990-2010 period, we discover that valuations rise after countries strengthen competition laws. The effects are larger among firms with more severe pre-existing agency problems: firms in countries with weaker investor protection laws, with weaker firm-specific governance provisions, and with greater opacity. The results suggest that antitrust laws that intensify competition exert a positive influence on valuations by reducing agency problems. |
| JEL: | G3 K21 K22 L4 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28908&r= |
| By: | Bellon, Aymeric; Harpedanne de Belleville, Louis-Marie; Pinardon-Touati, Noémie |
| Abstract: | This paper studies the resolution of disputes between firms and their lenders through external mediators, who suggest a non-legally binding solution to resolve a disagreement after communicating with all parties. We exploit an administrative database on firms’ outcomes matched to the French credit registry and plausible exogenous variation in eligibility to public mediators across counties for identification. Credit, employment and investment increase following the mediation, causing an overall reduction in firms’ liquidation of 34.6 percentage points. All the effects are driven by firms that borrow from more than one financial institution, supporting the view that mediators solve coordination problems between lenders. |
| Keywords: | Mediation, credit, asymmetric information, coordination of creditors, informal restructuring, financial constraints, debt overhang, bankruptcy, employment, investment, judge instrument, borders |
| JEL: | D82 G21 G28 H81 H89 |
| Date: | 2021–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108339&r= |
| By: | Song Ma; Joy Tianjiao Tong; Wei Wang |
| Abstract: | This paper studies how innovative firms manage their innovation portfolios after filing for Chapter 11 reorganization using three decades of data. We find that they sell off core (i.e., technologically critical and valuable), rather than peripheral, patents in bankruptcy. The selling pattern is driven almost entirely by firms with greater use of secured debt, and the mechanism is secured creditors exercising their control rights on collateralized patents. Creditor-driven patent sales in bankruptcy have implications for technology diffusion—the sold patents diffuse more slowly under new ownership and are more likely to be purchased by patent trolls. |
| JEL: | G33 O32 O34 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28856&r= |
| By: | Lalinsky, Tibor; Pál, Rozália |
| Abstract: | We utilize several unique firm-level datasets in order to assess the efficiency and effectiveness of the government support aiming to curb the economic consequences of the coronavirus (COVID19) pandemic. The results, drawing on the experience of a small open European country (Slovakia), suggest the distributed COVID-19 subsidies save non-negligible number of jobs and sustain economic activity during the first wave of the pandemic. General distribution rules designed on the fly may bring close to optimal results, as relatively more productive, privately owned, foreign-demand oriented firms are prioritized and firms with a higher environmental footprint or zombie firms record a relatively lower chance of obtaining government funding. By assuming constant cost elasticities to sales, we show that the pandemic deteriorates strongly firm profits and increases significantly the share of illiquid and insolvent firms. Government wage subsidies somewhat mitigate firm losses and have statistically significant effect, but relatively mild compared to the size of the economic shock. Our estimates also confirm that larger firms, receiving smaller relative size of the support, have more space to cover their additional liquidity needs by increasing trade liabilities or liabilities to affiliated entities, while SMEs face higher risk of insolvencies. |
| Keywords: | coronavirus,COVID-19,firm-level,policy measures,wage subsidies,profit,liquidity,solvency |
| JEL: | D22 H20 G32 G33 J38 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eibwps:202106&r= |
| By: | Katsafados, Apostolos G.; Leledakis, George N.; Pyrgiotakis, Emmanouil G.; Androutsopoulos, Ion; Fergadiotis, Manos |
| Abstract: | This paper investigates the role of textual information in a U.S. bank merger prediction task. Our intuition behind this approach is that text could reduce bank opacity and allow us to understand better the strategic options of banking firms. We retrieve textual information from bank annual reports using a sample of 9,207 U.S. bank-year observations during the period 1994-2016. To predict bidders and targets, we use textual information along with financial variables as inputs to several machine learning models. Our key findings suggest that: (1) when textual information is used as a single type of input, the predictive accuracy of our models is similar, or even better, compared to the models using only financial variables as inputs, and (2) when we jointly use textual information and financial variables as inputs, the predictive accuracy of our models is substantially improved compared to models using a single type of input. Therefore, our findings highlight the importance of textual information in a bank merger prediction task. |
| Keywords: | Bank merger prediction; Textual analysis; Natural language processing; Machine learning |
| JEL: | C38 C45 G1 G2 G21 G3 G34 |
| Date: | 2021–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108272&r= |
| By: | Mashekwa Maboshe |
| Abstract: | This paper investigates the responsiveness of firm-level investment to corporate tax changes in South Africa over the period 1999 to 2012. The study exploits rare changes in corporate tax policy to assess the responsiveness of firm-level investment among Johannesburg Stock Exchange listed non-financial firms. Our estimation of a neoclassical investment model using GMM techniques shows that although changes in corporate tax policy reduced the tax-adjusted marginal cost of capital over time, the reductions did not translate into significant investments in fixed assets. We speculate that the well-documented financial frictions in the capital markets could explain the failure of neoclassical investment theory in South Africa. Our findings are similar to those in other developing countries and crucially suggest that investment policies should look beyond the use of corporate tax incentives. |
| Keywords: | corporate taxation, capital investment, user cost of capital |
| JEL: | E22 H32 C23 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:863&r= |
| By: | Anabela Santos (European Commission - JRC); Karel Haegeman (European Commission - JRC); Pietro Moncada-Paternó-Castello (European Commission - JRC) |
| Abstract: | Using the results of the Survey on the Access to Finance of Enterprises (2009 to 2020 editions), this paper aims to assess the effect of Covid-19 pandemic on the probabilities of firm to innovate and grow and to compare their likelihood with that of the previous downturn. To control for a possible endogeneity bias as part of innovation decisions a Recursive Bivariate Probit Model is used. Results show that the probabilities of firms to innovate and grow are lower in 2020 (Covid-19 crisis) than in 2009 (financial crisis). The economic performance of innovative firms was also affected by the pandemic, but considerably less than the performance of non-innovative ones. Changes in the innovation patterns are also observed. Possible implications for decision-makers are derived. |
| Keywords: | Innovation; Growth; COVID-19; Europe. |
| JEL: | O31 O12 O52 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:termod:202103&r= |
| By: | Bo Becker; Efraim Benmelech |
| Abstract: | Corporate bond markets proved remarkably resilient against a sharp contraction caused by the 2020 Covid-19 pandemic. We document three important findings: (1) bond issuance increased immediately when the contraction hit, whereas, in contrast, syndicated loan issuance was low; (2) Federal Reserve interventions increased bond issuance, while loan issuance also increased, but to a lesser degree; and (3) bond issuance was concentrated in the investment-grade segment for large and profitable issuers. We compare these results to previous crises and recessions and document similar patterns. We conclude that the U.S. bond market is an important and resilient source of funding for corporations. |
| JEL: | E43 E44 E51 G01 G21 G23 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28868&r= |
| By: | Malmendier, Ulrike M.; Pezone, Vincenzo; Zheng, Hui |
| Abstract: | Traits and biases of CEOs are known to significantly affect corporate outcomes. However, analyzing individual managers in isolation can result in misattribution. Our analysis focuses on the role of CEO and CFO overconfidence in financing decisions. We show that, when considered jointly, the distorted beliefs of the CFO, rather than the CEO, dominate in generating pecking-order financing distortions. CEO overconfidence still matters indirectly for financing as the CEO's (and not CFO's) type determines investors' assessment of default risk and the resulting financing conditions. Moreover, overconfident CEOs tend to hire overconfident CFOs whenever given the opportunity, generating a multiplier effect. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14929&r= |
| By: | Manthos D. Delis; Pantelis Kazakis; Constantin Zopounidis |
| Abstract: | Firms with good management practices optimize and synthesize human resources, leadership, and technical and conceptual skills to enhance firm value. In this paper, we examine the role of management practices in merger and acquisition (M&A) decisions. M&A decisions are among the most important corporate decisions, on which firms spend a lot of resources and managerial qualities. We estimate management practices as a latent variable using a structural equation production model and Bayesian techniques. The key advantage of the Bayesian approach is the use of informative priors from survey-based management estimation methods, which are however available for a limited number of firms. Subsequently, we examine the effect of management practices on takeover events. We first show that management practices, on average, increase the probability of M&A deals. However, we also uncover a nonlinear U-shaped effect, which is consistent with the theoretical premise that poor management leads to many value-decreasing M&A deals, whereas good management leads to many value-increasing M&A deals. |
| Keywords: | OR in corporate finance; Management practices; Bayesian methods; Mergers and acquisitions; Nonlinear models |
| JEL: | G14 G34 C11 C30 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2021_10&r= |
| By: | Fichtner, Jan (University of Amsterdam); Heemskerk, Eelke; Petry, Johannes |
| Abstract: | Since the financial crisis there has been a massive shift from actively managed funds to passive funds that merely replicate financial indexes. Instead of active investors influencing states through their investment decisions, in this new economic reality the locus of agency is shifting from investors towards index providers as they decide which companies and countries are included into key benchmark indexes. We argue that the major index providers (MSCI, S&P Dow Jones and FTSE Russell) exercise growing private authority as they steer capital via their indexes. Index providers have become crucial intermediaries in the relationship between states and investors. Through producing widely used indexes, index providers essentially provide a crucial infrastructure that enables the creation and trading of increasingly passively allocated financial claims. Through the infrastructural power they derive from this gatekeeper position, index providers are able to ‘standardise’ the issuers of capital claims and the countries in which these issuers reside through determining the criteria that corporations and states, especially emerging markets, have to fulfil to qualify for index membership – and consequently asset allocation. This chapter therefore investigates the relationship between states and index providers and the latter’s influence on issues of domestic financial regulation, investor access and international capital flows. |
| Date: | 2021–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:x45j3&r= |
| By: | Robert M. Adams; Kenneth P. Brevoort; John C. Driscoll |
| Abstract: | Has information technology improved small businesses' access to credit by hardening the information used in loan underwriting and reducing the importance of proximity to lenders? Previous research, pointing to increasing average lending distances, suggests that it has. But this conclusion can obscure differences across loans and lenders. Using over 20 years of Community Reinvestment Act data on small business lending, we find that while average distances have increased substantially, distances at individual banks remain unchanged. Instead, average distance has increased because a small group of lenders specializing in high-volume, small-loan lending nationwide have increased their share of small business lending by 10 percentage points. Our findings imply that small businesses continue to depend on local banks. |
| Keywords: | Banks; Credit Card; Small Business Lending |
| JEL: | R21 G21 G38 L25 |
| Date: | 2021–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-11&r= |
| By: | Kočenda, Evžen; Iwasaki, Ichiro |
| Abstract: | Bank survival is essential to economic growth and development because banks mediate the financing of the economy. A bank’s overall condition is often assessed by a supervisory rating system called CAMELS, an acronym for the components Capital adequacy, Asset quality, Management quality, Earnings, Liquidity, and Sensitivity to market risk. Estimates of the impact of CAMELS components on bank survival vary widely. We perform a meta-synthesis and meta-regression analysis (MRA) using 2120 estimates collected from 50 studies. In the MRA, we account for uncertainty in moderator selection by employing Bayesian model averaging. The results of the synthesis indicate an economically negligible impact of CAMELS variables on bank survival; in addition, the effect of bank-specific, (macro)economic, and market factors is virtually absent. The results of the heterogeneity analysis and publication bias analysis are consistent in terms that they do not find an economically significant impact of the CAMELS variables. Moreover, best practice estimates show a small economic impact of CAMELS components and no impact of other factors. The study concludes that caution should be exercised when using CAMELS rating to predict bank survival or failure. |
| Keywords: | bank survival, bank failure, CAMELS, meta-analysis, publication selection bias |
| JEL: | C12 D22 G21 G33 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2021-02&r= |
| By: | Gregori, Wildmer Daniel (European Commission); Martinez Cillero, Maria (European Commission); Nardo, Michela (European Commission) |
| Abstract: | This study empirically investigates the extent to which firms in the European Union, once acquired through a cross-border acquisition, show different productivity levels as compared to those firms that have not been acquired. Our identification strategy relies on the combination of Propensity Score Matching and the Staggered Difference-in-Difference estimator, using firms’ balance sheet for the years 2008-2018. We find that cross-border acquisitions decrease the productivity of the acquired firms, especially in the manufacturing and services sectors, as well as in less knowledge intensive activities. Firms targeted by acquirers originating in emerging market economies also experience a negative effect on productivity. |
| Keywords: | Cross-border M&As, FDI, TFP, European Union, Propensity Score Matching, DiD |
| JEL: | D24 F23 F60 G34 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:202106&r= |
| By: | Gounopoulos, Dimitrios; Luo, Kaisheng; Nicolae, Anamaria; Paltalidis, Nikos |
| Abstract: | How banks managed the COVID-19 pandemic shock? The eruption of the financial crisis in 2007 evolved to a crisis of banks as liquidity providers (Acharya and Mora, 2015). The COVID-19 pandemic shock was associated with a surge in households’ deposits and a subsequent liquidity injection by the Federal Reserve. We show how the pandemic affected banks’ liquidity management and therefore by extension, the creation of new loans. We empirically evaluate the creation and management of banks’ liquidity through three well established mechanisms: market discipline (supply-side), internal capital markets (demand-side), and the balance-sheet mechanism which captures banks’ exposure to liquidity demand risk. We provide novel empirical evidence showing that households increased savings as a precaution against future declines in their income. Also, depositors did not discipline riskier banks, and the internal capital market mechanism was not in work during the pandemic. Hence, weakly-capitalized banks were not forced to offer higher deposit rates to stem deposit outflows. Furthermore, weakly-capitalized banks increased lending in the first phase of the pandemic, while in the midst of the pandemic, they cut back new lending origination and increased their exposure to Fed’s liquidity facilities. Well-capitalized banks on the other hand, increased lending in line with the increase in their deposits. Banks with higher exposure to liquidity risk were vulnerable to deposit outflows and increased their exposure in Fed’s liquidity facilities significantly more than low-commitments exposed banks. |
| Keywords: | Financial Institutions; Liquidity Risk; Bank Lending; COVID-19; Monetary Policy |
| JEL: | E51 E58 G21 |
| Date: | 2021–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108219&r= |
| By: | Konstantin Makrelov; Neryvia Pillay; Bojosi Morule |
| Abstract: | South Africa’s fiscal balances have deteriorated significantly over the last decade, while the economy has been recording disappointing economic growth rates even prior to the COVID-19 crisis. In this paper, we estimate a series of equations using the Arellano and Bond (1991) estimator to test how sovereign risk premia affect capital buffers, while controlling for variables identified in the literature, such as size of banks, the economic cycle, competition and equity prices. Unlike other studies, we use actual capital buffers provided by the South African Prudential Authority. We show that these are substantively different to the proxy buffers calculated using the common approach in the literature, indicating that results based on proxy measures should be interpreted with caution. Our overall results show a positive relationship between the sovereign risk premium and capital buffers, and the results are robust across different specifications. This suggests that banks are accumulating capital to mitigate against fiscal and other domestic policy risks, and the related financial stability issues. It is likely that this is contributing to higher lending rates. |
| Keywords: | fiscal policy, capital buffers, Financial Regulation, sovereign-bank nexus, South Africa |
| JEL: | C23 E62 H32 G28 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:862&r= |
| By: | Roncalli, Thierry; Cherief, Amina; Karray-Meziou, Fatma; Regnault, Margaux |
| Abstract: | This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers liability liquidity risk (or funding liquidity) modeling, the second dimension focuses on asset liquidity risk (or market liquidity) modeling, and the third dimension considers the asset-liability management of the liquidity gap risk (or asset-liability matching). The purpose of this research is to propose a methodological and practical framework in order to perform liquidity stress testing programs, which comply with regulatory guidelines (ESMA, 2019, 2020) and are useful for fund managers. The review of the academic literature and professional research studies shows that there is a lack of standardized and analytical models. The aim of this research project is then to fill the gap with the goal of developing mathematical and statistical approaches, and providing appropriate answers. In this second article focused on asset liquidity risk modeling, we propose a market impact model to estimate transaction costs. After presenting a toy model that helps to understand the main concepts of asset liquidity, we consider a two-regime model, which is based on the power-law property of price impact. Then, we define several asset liquidity measures such as liquidity cost, liquidation ratio and shortfall or time to liquidation in order to assess the different dimensions of asset liquidity. Finally, we apply this asset liquidity framework to stocks and bonds and discuss the issues of calibrating the transaction cost model. |
| Keywords: | Asset liquidity, stress testing, bid-ask spread, market impact, transaction cost, participation rate, power law, liquidation cost, liquidation ratio, liquidation shortfall, time to liquidation |
| JEL: | C02 G32 |
| Date: | 2021–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108295&r= |
| By: | Weill, Pierre-Olivier |
| Abstract: | I review the recent literature that applies search-and-matching theory to the study of Over-the-Counter (OTC) financial markets. I formulate and solve a simple model in order to illustrate the typical assumptions and economic forces at play in existing work. I then offer thematic tours of the literature and, in the process, discuss avenues for future research. |
| Keywords: | Asset Pricing; OTC markets; search frictions |
| JEL: | G11 G12 G21 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14847&r= |